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Olivers Insights - The US Federal Reserve starts quantitative tightening

The US Federal Reserve starts quantitative tightening

Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital.
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The following note looks at the decision by the US Federal Reserve to commence monetary tightening and continue the process of gradually raising interest rates. 

The key points are as follows:

  • The Fed has confirmed it will start reducing its balance sheet by not reinvesting bonds up to set limits as they mature. This amounts to quantitative tightening as it will start to reverse some of the quantitative easing that occurred during and after the Global Financial Crisis.
  • The Fed is still anticipating another rate hike by year end and three more next year, but still sees rate
  • Just as quantitative easing put downwards pressure on bond yields, quantitative tightening will likely put upwards pressure on bond yields, all other things being equal.
  • Ongoing monetary tightening in the US relative to other major countries including Australia is likely to see the US dollar start to rise again, which should take some pressure off the $A.
  • That quantitative easing in the US can now start to be reversed is very good news - basically it's done its job in helping get the US economy back on track after the GFC.

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